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Building equity is a crucial part of increasing your wealth. One of the strongest justifications for why people should buy rather than rent their homes is equity. After all, no one enjoys having a mortgage looming over their shoulders.
As an investor, your top aim is to build equity in your property. The more of it you own, the more valuable your assets become. However, there is a point at which you should not put all of your efforts towards equity if it means compromising your liquidity. Choosing equity over liquidity can put your finances at risk.
As an investor, you’re probably eager to get your mortgage property paid off. As soon as you pay off your debt, the more rental income you’ll receive. Paying out your mortgage with all of your cash on hand, on the other hand, is not a good idea. Understand how equity works and how to assess your liquidity risk in order to understand how this could lead to bankruptcy – and how to appropriately manage your assets.
So, if you would like to learn how to appropriately manage your investment financing to reduce your risk of bankruptcy, click the link below to book a free strategy call with our team at LendCity. Then, we can discuss how to arrange you finances so that real estate investing grows you wealth instead of making you bankrupt.
Discover How To Develop Real Estate With This Step By Step Guide
Consider all the factors
After deducting debt, equity is the entire amount of your property that you own. Subtract your loan balance from the current market value of your home to find out how much equity you have. There are two methods to build equity in your home: increasing the value of the property or lowering the amount you owe.
It can be difficult to increase the value of your home. You may either wait for the market to improve real estate values, or you can actively invest in increasing the worth of your home. Renovations such as modernizing the kitchen and making the home more energy-efficient can increase the property’s value. Routine maintenance isn’t as showy, but it’s an important element of increasing the value of your property. Both of these forms of repairs demand upfront expenditure and may not necessarily yield a good return on investment.
Paying off debt appears to be a simple process: the more you play, the more equity you have. The majority of typical mortgages are designed to be paid off over a long period, such as 30 years. Payments made every month result in more equity. Some property owners want to take a more active approach and take out loans with shorter periods, such as a 15-year mortgage. Others prefer to make extra payments every month or send in a lump sum payment regularly.
Renovations or planning for accelerated debt payback are traditional ways to raise equity quickly, but they’re only good ideas if you can afford them. You risk losing all of your assets if you don’t.
Investors must examine the liquidity risk before investing their money in a certain asset. When you’re ready to sell, there’s always the risk that the investment won’t find a buyer, eaving you with a valuable asset at a time when you’re short on cash If you lose your job and need to sell your rental property, there are a few things you can do.it requires some time to find a buyer. It might be terrible and lead to bankruptcy if you put all of your money into the investment property.
When does equity become a factor in bankruptcy?
Continuing with that horrible example, if you lose your job and are unable to sell your home, the financial dominos will continue to fall. If your tenants decide not to renew their lease, you will be left without any money to pay your mortgage. Because the bank wants to collect its losses as soon as possible, they will pursue foreclosure after two to three months of nonpayment from you.
If you don’t have a lot of value of the home, it’s a good idea to sell it. selling it for a low price won’t make the bank any money. To recoup their losses from your loan, they would need to sell the home for at least $225,000 if you paid $75,000 on a $300,000 property. On the other hand, the bank knows that if you’ve been playing at a faster pace and only owe $25,000, they’ll be able to easily reclaim the remaining sum. This makes your home more sensitive to foreclosure than someone who owes a large amount to their home.
How can you reduce the risk of bankruptcy in your investments?
Liquidity is the most effective approach to avoid foreclosure and bankruptcy. You can avoid foreclosure if you continue to make your minimum monthly payment on time. That’s why it’s critical to always have enough cash on hand and/or liquid investments to keep your mortgage and other obligations current.
Debt is penalized, yet the amount of cash you have on hand after you’ve made your monthly payments is more essential than your total debt. The more money you have left after making your monthly payments, the less likely you will get into financial difficulties owing to a cash shortage.
By ensuring that you make investments that you can afford, you may expand the gap between your take-home pay and your debt commitments. Don’t fall for get-rich-quick schemes or convince yourself that selling your assets to acquire an investment property is a good idea. The smartest investors recognize that liquidity, not return on investment, is their top financial priority.
Of course, staying hydrated comes with its own set of concerns. You aren’t growing equity or increasing liquidity if you continue to spend your money elsewhere and don’t pay your mortgage. Some people find it difficult to have unrestricted cash on hand and would rather put it towards a different investment. If you have some additional money and wish to put it to good use, consider a liquid investment. Money market funds and publicly-traded company shares are examples of liquid investments.
Nobody likes to be in a debt situation. The average Canadian consumer owes $71,000 in debt, including mortgages, credit cards, student loans, medical expenses, and other debts. You’re probably better off as an investor than the typical Canadian because you can afford to put your money into more properties and generate passive income. To successfully develop your wealth and preserve your investment and personal finances, you’ll need to strike the correct balance between liquidity and debt.
In order to avoid bankruptcy, you need to be working with a mortgage broker that understands which lending options you need and when. That way you are getting the finances you need without accidentally bankrupting yourself. That is why we want to offer you a free strategy call today to discuss smart, reliable financing options. All you need to do is click the link below and book your call.